John Malone's Deputy on the Media

A YEAR AGO, BARRON'S ONLINE WROTE positively about the return to the limelight of cable baron John Malone, who made a big name for himself back in the late '90s when he sold his cable firm, TCI, to
AT&T
for $54 billion.

In May 2006, Malone's new venture,
Liberty Media,
spun itself into two tracking stocks, and Barron's Online wrote that
Liberty Capital
(ticker: LCAPA), the stock representing Malone's interests in a passel of businesses including
News Corp.
and
Time Warner,
would become increasingly valuable as Malone rightsized that holding company. (See Weekday Trader, "John Malone at Liberty Again," May 11, 2006.)

We're happy we made that call. As Malone and his deputy, Liberty Capital Chief Executive Greg Maffei, blazed through a series of deals in the last 12 months -- selling off Liberty's stake in News Corp., and gaining controlling stakes in the Atlanta Braves and satellite television provider
DirecTV Group
-- shares of Liberty Capital have risen 47%.

Barron's Online sat down with Maffei to see what he plans to do for a second act to keep Liberty Capital, and the other tracking stock,
Liberty Interactive
(LINTA), rising.

Barron's Online: Given its many businesses, has Liberty Capital gotten easier for investors to value? And how much further does it have to go?

Maffei: One of our investors said, you've reduced line items but there's still too many lines of business or partial investments. [T]here's more to be done. We do trade at a significant discount to net asset value by most third parties' reckoning. Most people think the discount arises from three sources.

One is a holding company discount that goes back to having too many line items and assets that are passive. Second is a tax discount, the assumption that we won't be able to get out of positions efficiently. And third, some people have talked about a tracker discount. I think the last is the smallest and most explainable over time. And we hopefully will continue to work on tax-efficiently getting out of positions and getting greater focus around things like DirecTV.

Q:What do you say to reassure skeptics about your business? A: I would say, look, in the last 15-odd months we sold half of Court TV, we got out of our IDT stock and swapped it for IDT Entertainment, we sold our control stake in
OpenTV.
We sold On Command. We agreed to swap our News Corp. stake for the 40% stake in DirecTV. We swapped part of our stake in Time Warner for cash and the [Atlanta] Braves, and publisher Leisure Arts.

And we swapped our stock in
CBS
for a CBS station and cash. So, while we've been cautious, we've also done eight or so transactions which moved a significant portion of the assets attributed to Liberty Capital off of the books. I'm hoping in the next year we can make the same sort of progress and move more items [off the books], and that we'll gain greater focus. If ultimately the way to get shareholder value up, and I'd like to think we're shareholder-focused, is to split into two companies, that won't hold us back. So far, we're happy with how the market has responded to the tracking stocks.

Q:Let's talk about the shape of Liberty going forward. It's been said Liberty Interactive is about putting QVC together with complementary assets, and Liberty Capital is about putting DirecTV together with assets. A: That's fundamentally fair. Liberty Media got created around the power of seeing that distribution could drive content and content could drive distribution. TCI was the distribution lever, and Liberty was the content lever. In a way, we're replicating that traditional formula perhaps, and seeing some positive interplay between content and distribution, potentially between DirecTV and some of the content we own and might add to. And in another way we're doing the same thing where QVC has a strong distribution arm given its video home-shopping network and given its eight million-plus customers, world-wide, who buy through them; their exposure of new content, new brands to that audience through that home-shopping distribution has a similarity to that model that we did at TCI and Liberty.

Q:What about Home Shopping Network and Expedia, both managed by IAC/InterActiveCorp's Barry Diller. Are they acquisition targets?

A: We own roughly 23% of the economic value of each of
Expedia
and HSN. We find both interesting as investments [&hellip;] but ultimately we are unlikely to get the highest and best value of our own equity by owning pieces of other equities, particularly where they are controlled through some arrangement by someone else. They're going to trade at some discount off of that. So if we had an operating business that was synergistic, that we could acquire in exchange for shares at an attractive price, that probably is a preferable condition. [W]hile that is possible, it's not something that I think has to happen or will necessarily happen at the right price. Frankly, HSN results recently have not been what we would like, probably not what Mr. Diller would like.

Q:Are you looking to add properties that are primarily retail outfits to QVC and Liberty Interactive? A: Yes, they're primarily consumer-oriented brands that could be distributors, or could be also just&hellip;the brand itself. And then we have online retailers: [We bought] Provide Commerce, which is, primarily through a subsidiary, one of the leading Internet retailers of flowers. In that case, the branding goes to the retailer. You're trying to associate the power of that ProFlowers brand, which is weaker, with the QVC brand. And you also have BuySeasons, which is the leading online costume retailer. And now we have Backcountry, which is a seller of ski and other outdoor goods online.

Q:Are there other assets out there you would like to acquire? A: We like the e-commerce space, but as a practical matter, if you asked one to say, with market caps between $50 million and $5 billion [&hellip;] how many independent e-commerce companies [there are] that are e-commerce retailers, or e-tailers, that have somewhat synergistic, attractive businesses, that are not at very high multiples, and that are independent, rather than being divisions of another retailer -- that's not an enormous universe.

Q:We believe here at Barron's that Blackstone Group's IPO is hitting a top in the bubble. Do you think we're at the crest of the leveraged buyout and private-equity madness? A: I wouldn't call it madness. Those guys have done a tremendous job of creating wealth for their limited partners and probably even more for themselves. But I think
Blackstone
going public is probably some indication that private equity, who are smart market timers, understand that it's a good time to be a seller, not a buyer, of those kinds of equities. But at least nominally to have [Blackstone] at the multiple it is relative to Goldman Sachs seems perhaps harder to justify.

Q:What are your goals for DirecTV? A: As far as having the 40%-odd stake in DirecTV, we find that very attractive because it has a lot of the characteristics that we like: a growing business that is leverageable and a balance sheet that probably has the capacity for more leverage. [Liberty Media] has publicly stated there are potential synergies between [DirecTV's] business and our existing content businesses, the opportunity to add other content and synergistic assets around it, and work together with DirecTV -- all of those are interesting capabilities.

Q:What other assets are complementary to DirecTV? A: There are cable properties which are potentially going to become available. If a network were for sale, it's certainly something that we might be able to bring synergy to, it might be able to bring synergy to us, and at the right price we might look at it. You also are seeing lots of areas around new media where not only social networks but other kinds of Internet properties might have good interplay with some of our cable programming properties. [Editor's Note: Liberty owns the Starz Entertainment Group, which runs the Starz and Encore movie channels.]

Q:What do you think of MySpace? A: MySpace has been a tremendous purchase for News Corp., and Rupert Murdoch, Peter Chernin and Dave DeVoe deserve great credit. That said, the space is volatile. And what Facebook has done to create a platform and open itself up and leverage the developer community and what interest that will generate among users and the growth rate at which consumers are likely to be adding to Facebook over the next three to six months, I think will greatly accelerate past the growth rate of MySpace. Not that MySpace will not turn out to be a great deal, but the hot horse is likely not to be MySpace for the next six months. That is the potential that's out there -- these things change quickly.

Q:You have said recently you would consider selling some assets of Liberty Capital's holdings outright, instead of swapping them, thus incurring taxes. Have you come any further in your thinking on that score? A: There's a certain point you're going to reach where there are fewer opportunities for tax-free exchanges. We may have to just bite the bullet and pay the taxes because it's more strategic to us and more beneficial to conduct [acquisitions] with cash rather than [get] an asset that doesn't fit.

John Malone's Deputy on the Media

A YEAR AGO, BARRON'S ONLINE WROTE positively about the return to the limelight of cable baron John Malone, who made a big name for himself back in the late '90s when he sold his cable firm, TCI, to AT&amp;T for $54 billion.

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